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Paleomonetarism

December 19, 2010 4:15 pmDecember 19, 2010 4:15 pm

I used that term — it’s probably not original, but who knows? — in a recent post about the increasingly obscure meaning of the
money supply. The best example would surely be Ron Paul, who’s now going to have oversight over the Fed. If you read his stuff,
it’s very clear: money is a well-defined quantity that the Fed controls, and inflation comes from — indeed is defined as — increases in that quantity.

What he means, I guess, is monetary base. Here’s the actual relationship between monetary base and inflation:

It’s also worth nothing that in normal times (not now), monetary base consists overwhelmingly of currency (bank reserves are normally very small), and the majority of US currency isn’t even being held
in the United States.

It’s kind of terrifying, in a way, to realize that the politically dominant faction in America right now has a view of money, what it is, and how it works that hasn’t been true since the early 19th century,
if it ever was.